New ROTH Provisions In Secure 2.0 Act

Financial Planning Concepts

The recent SECURE 2.0 Act creates several retirement planning opportunities, particularly with Roth accounts in previously restricted traditional retirement accounts.

SIMPLE Roth IRAs and SEP Roth IRAs

Beginning in 2023, SIMPLE IRAs and SEP IRAs are allowed to accept Roth contributions.  SEP IRAs are funded exclusively by the employer (i.e., employees are not permitted to contribute to SEP IRAs); therefore, all employer contributions to a Roth SEP IRA are classified as taxable compensation to the employee.  In contrast, employer contributions to a traditional SEP IRA will not be classified as taxable compensation (i.e., employees will not be taxed on employer contributions to traditional SEP IRAs).

As previously mentioned in a prior Brown Financial Advisory Newsletter, in 2024 “ALL catch-up contributions for employees with incomes above $145,000 (i.e., indexed for inflation starting in 2025) will be required to be deposited into a Roth account.”  An exception exists for SEP IRAs and SIMPLE IRAs in that the new catch-up contribution rule does not apply to these accounts.

Matching Contributions in 401(k), 403(b), and 457(b) Defined Contribution Plans

Effective December 29, 2022, employers with 401(k), 403(b), and 457(b) defined contribution plans may provide employee participants in these plans the option of receiving matching contributions on a Roth basis.  Like employee elective Roth contributions (i.e., after-tax contributions), employer matching contributions paid into a Roth account on behalf of the employee will be classified as additional taxable compensation to the employee.

After SECURE 2.0 Act, the employer’s elective contributions and matching contributions are no longer limited to traditional accounts.  Provided an employer’s plan offers the SECURE 2.0 Act’s option of receiving matching contributions on a Roth basis, employees will have additional decisions to make as to the placement of their elective retirement contributions and the employer’s contributions.  Employer-provided retirement education to the plan participants will need to address these new accounts and help guide the employee in making the right allocation of any employee and employer contributions to the proper account type.

Rolling Section 529 Education Savings Accounts to Roth Accounts

After December 31, 2023, individuals that have a Section 529 Education Savings Account for at least fifteen (15) years can elect to make a direct rollover to the beneficiary’s Roth IRA.  SECURE 2.0 Act qualifies this trustee-to-trustee transfer on Section 529 account funds (and earnings on those funds) that have been held for at least five (5) years prior to the rollover distribution to the Roth IRA.  There are several requirements and limitations to this Section 529 strategy; however, it provides a nice financial planning solution for those individuals concerned about overfunding their children’s Section 529 accounts and the resulting penalties that would be assessed for non-qualified education distributions. 

Please contact us to discuss how these provisions may impact you.

Source: 2022/2023 Federal and California Tax Update, SECURE 2.0 Act, Spidell Publishing, LLC.

The foregoing content reflects the opinions of Brown McLeod, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. All tax, legal, investment and other strategies should be discussed with the appropriate professional prior to implementation.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

Posted in Financial Planning Concepts